Credit 101
Here are the facts on revolving credit and how it can affect your credit score either positively or negatively.
The average credit score is 703 in the U.S., according to Experian. If you don’t know your credit score, you may not know how you compare to the average. You may also not know why it’s important to improve your score. In this article, we provide tips for how you can learn your score and what to do if you don’t have one yet.
One way to know if you have a score is to use one of the available credit score services, such as Credit Sesame, Credit Karma, or Mint, to see where you rank. If you’ve opened a loan account with a bank or credit card company more than six months ago, you should have a score. You can also check your free credit history each year at AnnualCreditReport.com to see what credit activity you’ve participated in that would also contribute to this score.
There’s no such thing as a zero score. Having “no score” simply means you don’t have any number tied to your credit profile. You can be absent from the scoring model if you’ve never had a credit card or loan, or if you haven’t used credit in a long time. It’s also possible that your new line of credit hasn’t been reported yet.
So, you’ve checked your credit, only to learn that you don’t have a score. Now what? There are some essential facts to keep in mind as you work toward establishing credit.
A lack of a score doesn't always mean you have a complete lack of credit history. Equifax, Experian, and TransUnion each track things a bit differently, but one or all could have data on you. It's also possible that your credit report will show activity that's too old to be counted in a credit score or too recent to show up. Scores generally only count the past two years in their scoring model.
If your open accounts are old and you haven’t used them in the past two years, you could have no score. This is true for accounts that you have closed, or accounts that don’t report to the credit agencies. One way to make sure your data is contributing to a score is to reopen old accounts or only do business with lenders that report to the three major credit bureaus.
While you can still access some forms of credit without a credit score, it’s very difficult to do so. Plus, it’s likely that you’ll be shut out of some of the better credit options. Yes, it’s true that you need credit to get credit. So, what should those without a credit score do? Consider some of the other credit-building activities listed later in this article.
A lack of credit score doesn’t tell lenders that you can’t handle credit. It’s more an indication that you haven’t proven yourself yet. As soon as you start participating in credit-building activities, you can quickly see your score appear—and improve, if done responsibly. It's sometimes much easier to build a credit score from scratch than it is to fix a weaker one.
Opening a new credit account may not show up on your credit score for six months, or even longer. You must be patient when expecting a score from nothing. This also proves why it’s important to stop delaying credit activities. The sooner you act, the sooner you’ll see a score.
Banks stay in business by issuing credit to people who are responsible enough to pay it back. Without an intimate knowledge of how you spend your money, a credit score and credit history are the next best thing. They give the lender an idea of the risk they are taking when they lend to you. Then, they can approve or deny your application based on that risk.
Credit histories and scores are also important for other areas of your life, such as applying for car insurance or getting jobs in the financial sector. Landlords may also require you to have a suitable credit score before they rent to you.
The number one thing to do if you lack a credit score is to start building one. These steps are available for those who are just starting out.
If a spouse or family member can add you as an authorized user on a card, you have an opportunity to start building credit. Keep in mind that as an authorized user you won’t be solely responsible for paying the bill, so make sure to coordinate accordingly.
Also, others may be reluctant to add you if you have a history of questionable money mistakes. In that case, see if you can be added as an authorized user but not actually get the physical card to spend on. This move can also affect your score negatively if the person fails to pay a bill, so partner up with someone who is money smart.
Another option for getting a loan is to use a co-signer. This individual will put their name on the loan as a guarantee that, if you fail to make payments, they would be held liable. This is another situation where it pays to have a trusting relationship with someone who has good credit and who trusts you to make payments on time each month.
If you have cash available, you could be approved for a secured credit card. These cards can be used just like your typical credit card, but they only allow you to charge up to the credit line equal to a cash deposit put down in advance.
If you put down $500 in cash deposits, for example, you’ll have $500 to spend with that card. Prompt repayment of the card bill will soon have you building that much-needed credit score.
Your credit score is based on several factors, one of them being your credit mix. Credit mix is a term that describes the types of credit you use. Student loans, car loans, or mortgages are considered installment credit. Credit cards or bank lines of credit are considered revolving credit. Having a little of each is the best way to keep your score healthy.
If you shop in-store, it’s common to be asked to sign up for a store card when you pay for your purchase. While these cards generally have higher interest rates and very low credit limits, they can be an ideal tool for building credit. Approval rates are generally higher, and these cards can sometimes come with extra perks, such as a percentage off your initial purchase or special in-store coupons.
You may be eligible for a credit-builder loan, a special type of small loan issued by credit unions and banks. This loan requires a cash deposit of the same amount to be held in an interest-bearing account while you repay. It’s similar to a secured credit card, and it isn't ideal for those looking for access to cash. You get the benefit of earning a small amount of interest on your deposit while building the credit needed for a traditional loan. It will also count as an installment loan, which is a different type of credit than what you establish with a secured credit card. By diversifying your credit types, you’ll raise your score even more.
If you rent, you may be able to use your on-time payments to build your credit score. Rent payments aren’t usually reported to agencies by default, but it’s OK to ask your landlord or management company if it’s an option. There are a few independent reporting companies that will take on this responsibility for you as well. Experian, for example, partners with several through its RentBureau partnership. Prices for these services vary.
Ideally, having a healthy score is the best way to access all the credit solutions you need in life. However, that starts with knowing that you have one. Checking your score and taking the right steps today can have a profound impact on your financial tomorrow.
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Here are the facts on revolving credit and how it can affect your credit score either positively or negatively.
